Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market

Secretary Strategist for Morgan Stanley Research. Along with my colleagues bringing you

their perspectives, I'll be talking about Asian equities and why we continue to be more

cautious than consensus. It's Thursday July 15th at 7.30 a.m. here in Hong Kong.

At the end of last year, there was a high degree of investor optimism that 2021 could

be a great year for Asia and Emerging Market equities. Indeed at the back end of 2020 and

into early this year, we tracked 24 straight weeks of inflows to dedicated Asian EM equity

products, amounting to over $100 billion USD. The idea was a strong recovery in the global

economy, easy monetary conditions, a significant recovery in global trade, and a week USD would

benefit these markets. But yet to date, the broadest index of Asian equities which we track

is flat in US dollar terms versus a 15% gain for the S&P 500 and 8% for Euro stocks. So

what went wrong and where do we continue to differ from consensus on these markets? We've

had four key issues of concern which led us to downgrade our stance on Asian EM in early

February and which we think only one of which has partially adjusted more favorably in recent

weeks. Our initial concern was China's tightening cycle and its impact on economic growth. As

far back as the fourth quarter of last year, the growth rate of money supply began to

peak as China's authorities removed stimulus given the strong recovery in exports and investment

and concerns on leverage and property market overheating. We've found that Asian equities

tend to respond as much if not more to Chinese policy cycles than to those in the US given

the higher degree of trade and investment linkages these days between Asia and China

and between Asia and the US. Chinese tightening has led the growth rate of M2, a relatively

broad measure of money supply in China to fall from 11% year on year at the peak to 8%

...